Sales tax implications of tariffs: An overview

The United States has recently imposed new country-specific tariffs on imported goods from Canada, China and Mexico, as well as steel and aluminum tariffs. Additional tariffs are set to go into effect in the coming months.

The implications of taxes and tariffs have raised concerns among U.S. businesses, now questioning how to navigate these changes and how they might affect operations.

What are tariffs?

Tariffs are taxes imposed on imported goods.

When tariffs make these goods more expensive, businesses may choose to pass the additional costs onto their customers. Consequently, it is crucial to understand how tariffs should be handled for sales and use tax purposes.

Sales tax implications for businesses and consumers

The inclusion of tariffs in the taxable amount for sales tax purposes can have several implications:

• Businesses: Companies that import goods must account for the additional cost of tariffs when pricing their products. This can affect their competitiveness and profitability, especially if they are unable to pass the full cost of tariffs onto consumers.
• Consumers: Higher prices due to tariffs can lead to increased sales tax payments, which can affect consumer spending. Consumers may seek alternatives to imported goods or reduce their overall consumption to mitigate the impact of higher prices.
• State revenue: States that include tariffs in the taxable amount for sales tax purposes may see an increase in sales tax revenue. This can benefit state budgets but may also lead to higher costs for consumers.

State guidance on tariffs and sales tax

When determining whether tariff charges are included in the taxable sales and purchase price, the rules can vary significantly from state to state.

Some states have issued guidance on how tariffs affect sales tax calculations. Here are some examples:

California

The California Department of Tax and Fee Administration has stated that tariffs charged to an importer and then passed on to a customer must be included in the taxable amount of the sale and is subject to sales tax.

Wisconsin

Wisconsin has provided clear guidance on the inclusion of tariff charges in the taxable sales and purchase price.

According to the Wisconsin Department of Revenue, tariffs imposed directly on an importer and passed on to the importer’s customer in a subsequent sale are included in the importer’s sales price and are subject to Wisconsin sales and use tax. This means that even if the tariff amount is separately stated on invoices, it is still part of the tax base on which sales and use tax is calculated.

For example, if an importer in Wisconsin incurs a tariff on goods and then sells those goods to a customer along with a charge for the tariff, the tariff amount must be included in the sales price for tax purposes, even if separately stated.

However, tariffs are not subject to sales or use tax when paid by the importer, even if the importer’s purchase is taxable, if they are legally imposed on the importer and separately stated on the invoice.

Wisconsin, along with 22 other states, is also a full member of the Streamlined Sales Tax (SST) initiative. SST aims to simplify and standardize the collection and administration of sales and use taxes across multiple states in the U.S.

Member states may benefit from uniform definitions, which can help clarify what’s included in gross receipts that are part of the sales price and subject to sales tax.

States without official guidance

Many states have not published official guidance on whether tariff charges should be included in the taxable sales and purchase price. This lack of guidance can create uncertainty for businesses operating in those states.

In the absence of specific state guidance, businesses often rely on general principles of sales tax law. Typically, the definition of “sales price” includes all receipts received by the seller, which could imply that tariff charges should be included in the taxable base.

However, without explicit rules, businesses must tread carefully and may need to consult with tax professionals or legal advisors to help ensure compliance.

How Wipfli can help

Navigating tariffs and their impact on sales and use tax can be challenging for businesses.

Wipfli’s experienced professionals are well-versed in handling complex sales and use tax issues. We focus on aligning solutions with your business objectives so that you can better understand the impact of tax obligations, mitigate risk and stay in compliance.

Reach out to our state and local tax team today for help navigating your tariff concerns.